How to File a State Income Tax Return

Instructor: Keocha Evans

Keocha has taught college Accounting and Business courses, she has master's degree in Business accompanied by a Bachelors degree in Accounting.

Employee wages are usually subject to two types of withholding: federal income tax and state income tax. In this lesson, we'll review the proper documents and forms needed to file a state tax return.

What Are State Income Tax Returns?

Did you know that states collected over $310 billion dollars from individual income taxes in 2013? State income tax is used to fund a variety of different programs, such as K-12 and higher education, medicaid, correctional facilities, and other needs that the state may have. Individuals that live or are employed in a particular state must usually file taxes with the state each year.

A state income tax return is a document that is filed with the state tax board. It reports individual income, business profits and losses and other deductions as well as details about tax refunds or tax liabilities. State income taxes apply to most types of income earned by individuals, including salaries and wages, business income, rental income, etc. The rate and way income is taxed is different for each state.

State Tax Laws

Individual income taxes are a major source of revenue for state government. Approximately, 43 states levy individual income taxes; 41 impose a tax on wages and salary, while two states (New Hampshire and Tennessee) exclusively tax dividends and interest income. There are seven states that do not levy an income tax on individuals at all. Unless you are one of the lucky seven, chances are you will be filing an income tax return for your state.

Don't panic just yet; the state won't take all of your money - just some of it. Even if you aren't part of the lucky seven, you could still be exempt from filing. In majority of the states, you are exempt from individual income tax if your federal adjusted gross income is less than or equal to the sum of your federal standard deduction. To determine if you qualify for exemption, complete a Tax Exemption Worksheet provided by your state.

Calculating State Income Tax

The way income is taxed varies by state. Some states uses brackets similar to those used in federal taxes, and other states use a flat rate, with one rate applying to all taxable income or adjusted gross income.

Adjusted gross income (AGI) is the amount of income that is subject to tax after subtracting all deductions and exemptions. AGI is also computed for your federal tax return on IRS From 1040. An exemption is an issued amount that each filer can exclude from his or her taxable income. There are two types of exemptions that can be used: personal and dependent exemption. A tax deduction is a specific expense that a taxpayer has incurred and can subtract from taxable income. Filers can claim a standard deduction based off filing status or an itemized deduction for expenditures such as mortgage interest, charitable contributions, and other qualifying expenses.

Tax Calculation Example

Let's look at an example. Mike and Ashley are married, with a combined income of $90,000. They have two dependent children. They are allowed four exemptions of $4,000 each (one for each child and one for each adult). When you multiply $4,000 by 4, you get $12,000. That figure is subtracted from their combined income of $90,000, reducing their AGI to $74,000.

If Mike and Ashley are married filing jointly and use the standard deduction of $12,600, their taxable income will be reduced even more; $70,000 - $12,600 = $61,400. With an AGI of $61,400, Mike and Ashley's will fall into two tax brackets.

A tax bracket is the rate at which an individual is taxed; these brackets are based off of income. The amount of income allowed for each bracket is separated by filing status.

Example: Mike and Ashley are married filing jointly; the first $18,450 of their taxable income is taxed at 10% ($1,845). The remaining taxable income of $42, 950 will be taxed at 15% ($6,442.50). Mike and Ashley tax bill will be $8,287.50, and their tax bracket will be considered 15%.

If Mike and Ashley reside in a state that uses a flat tax rate, like Colorado, which has a flat rate of 4.63% regardless of income level, their tax liability would be:

$61,400 (taxable income) multiplied by 4.63% (flat tax rate) = $2,842.82.

For a breakdown of tax rates and brackets you may contact your state's Department of Revenue.

Filing State Tax Returns

State income tax returns must be filed each year. There is no limit to the amount of state income tax returns one may file.

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